5 October 2011
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Setting global accounting standards in the public interest is an interactive process. The International Accounting Standards Board (IASB) needs input from business leaders, accountancy professionals, regulators, accounting educators, and – perhaps most importantly – those who use financial statements: investors and creditors. |
Why are the users of financial statements of primary importance? Because usefulness of the information in financial reports is the foundation of International Financial Reporting Standards (IFRSs). Our goal is to make financial statement analysis as straightforward as possible by improving the transparency, understandability, and comparability of information available to investors. In other words, we need to make sure that IFRSs give investors the information they need to make investment decisions, in a way that helps them to make those decisions. To achieve that goal, it is important that the IASB hears the investor’s voice.
When setting accounting standards, the IASB assesses the usefulness of the financial information that would be provided by companies applying IFRSs. If financial information is to be useful, it must be relevant (capable of making a difference in investment decisions) and it must be representationally faithful (it must portray realistically the economic phenomena that it purports to portray).
At the same time, the IASB recognises that reporting financial information imposes costs. It is important that those costs are justified by the benefits of reporting that information. Therefore, the IASB also assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information.
IASB’s due process
The IASB follows a rigorous set of procedures – referred to as our due process – aimed at ensuring that the Board and its constituents understand both the benefits and the costs of the financial information that would be provided by a new or amended IFRS. The IASB’s due process involves a series of mandatory and optional steps (such as working groups, discussion papers, public deliberations, and exposure drafts).
Click herefor more information about our due process.
| The IASB’s Due Process
The IASB’s due process involves a series of mandatory and optional steps, including:
- Forming a project working group of experts from a variety of stakeholder perspectives (including preparers, users and auditors of financial statements) to provide advice to the IASB. These are usually formed for major projects.
- Publishing for public comment a discussion document. These generally include the preliminary views of the board on some of the key issues in the project, and they are usually published for major projects.
- Publishing for public comment an exposure draft, which is a draft of an accounting standard.
- Inviting input on the issues raised in a discussion document and exposure draft not only through formal comment letters but also through outreach activities on our outreach activities and the panel on investor outreach in our offsetting project.
- Considering all comments received within the comment period on discussion documents and exposure drafts, as well as feedback received through our outreach activities.
- The Board discussing publicly the accounting issues in each project. The bases for those discussions are staff papers, which are available on the IASB’s website as observer notes. The papers summarise the accounting issues at hand, set out the pros and cons of alternative solutions, provide an overview of the feedback received in the comment letters or through outreach activities, and provide staff recommendations on how the Board should proceed on the issues. The staff’s recommendation considers any potential accounting alternatives and weighs the various views heard on the issue. At a public meeting, the IASB members deliberate and then vote on whether they agree with the staff’s recommendation or whether (and why) they want to take an alternative approach.
- Assessing whether to hold public hearings or round-table meetings, and whether to conduct field tests or field visits. The IASB generally holds public round-table meetings for nearly all major projects, usually in several locations around the world. At these, interested parties discuss their views with Board and staff members. And field tests or field visits have been done on a number of projects including insurance, financial statement presentation, and the IFRS for SMEs.
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IASB outreach activities
Components of the IASB’s formal due process are mostly one-directional: after thoughtful and comprehensive research and public deliberations, the IASB publishes documents that set out issues and ideas for public comment. And then, after similar study and deliberations, our constituents submit their comments. The IASB and other accounting standard setters have been doing this for decades, and it worked well. But as the issues get more complex, and particularly in a global environment, more is needed.
Our outreach activities are more bi-directional. Outreach augments our formal due process by giving the Board and project teams an opportunity to probe our constituents’ views and reasoning, and gives them the chance to do the same of us. It also enables us to zero in on the problem areas identified in the formal due process so that we can identify possible solutions. This is particularly important for getting input from the investor community because investors don’t usually send formal comment letters, so we need to get their input through other means. We have found that it is particularly useful for the non-investor Board members to hear first-hand the concerns raised by investors through the outreach process. We continue to try to improve our outreach initiatives to solicit input in a way that the Board can use. The outreach also helps investors to understand why the new accounting is an improvement and how it will differ from the information they get now.
Click hereto read about some of the ways we get input from investors and others.
| Types of outreach activities
Round-table meetings. These are public discussions that take place between selected outside participants and IASB members and project staff. During these sessions, participants can provide valuable additional insight to the IASB on comments put forward, whilst debating any issues or concerns they may have. The IASB also uses round-table meetings as a platform to explain and clarify proposals.
Regional discussion forums. These are organised by national standard setters and national or regional professional bodies to discuss issues that are of particular local or regional concern relating to projects that are open for comment.
Interactive webcasts. IASB members and project staff give interactive on-line presentations. Here, participants can view and listen to slides being presented, and can ask questions via the web with the option for listening by telephone. Webcasts can also be downloaded once completed and are available to the public.
Podcasts. We provide audio summaries of IASB and Interpretations Committee meetings, project updates and other useful information. Podcasts offer a high-level overview of the topic and are designed to be listened to on a computer or downloaded to a digital media player. Interested parties can subscribe via RSS feed or iTunes.
Outreach meetings. IASB members and project staff regularly hold educational sessions and attend meetings and conferences. These provide an opportunity for the IASB to present and explain its decisions and, at the same time, give interested parties a chance to voice and debate their views with IASB representatives.
Online surveys. Sometimes the IASB uses an online survey to gather views in support of or against a particular approach. These supplement face-to-face meetings and the comment letter process.
Project web pages. The IASB’s website has a section for each project. Project web pages include a milestone chart showing the target publication date of the next due process document; summaries of Board decisions updated after each Board discussion; links to the staff papers discussed in previous Board meetings; links to download comment documents, Snapshots (comprehensive project summaries published with an exposure draft) and Board and staff presentations on the topic; and staff contact details.
Email alerts. Interested parties can subscribe to free email alerts for news on a project by project basis.
Targeted emails, questionnaires, or invitations to comment. Sometimes, to seek views on a relatively narrow issue that has arisen in a project, the IASB will seek input via email, questionnaires, or invitations to comment. Most commonly targeted requests for views are sent to previous respondents to the discussion document or exposure draft on the project.
IFRS regional conferences. Each year, the IFRS Foundation organises several regional conferences, often jointly with the local professional accountancy body. These conferences encourage direct positive collaboration between regional standard setters, stakeholders and the IASB. |
As former chairman of the IASB Sir David Tweedie noted:
The crisis has changed standard-setting forever, but in a good way. It is no longer acceptable to take more than a decade to develop a new standard, or to simply drop proposals on to our constituents and wait for the replies. Proactive, responsive and accountable – these are the attributes of modern-day standard setting.
We make a special effort to involve investors, professional financial analysts and other users of financial statements in our project outreach programmes. A core element of this is our Investor Perspectives articles, written mainly by former analysts who are now members of the IASB. The articles offer investment professionals regular updates on items that are likely to be of interest.
The IASB does not intend either the formal due process or the additional outreach activities to be ‘popularity votes’ by which the IASB adds up the number of letters or views on various sides of an issue and moves in the most popular direction. Letter writing campaigns do not win the day. Our due process involves gathering information and reasoning that helps the IASB assess what information best serves the needs of users of financial statements in a cost-beneficial way.
Joint outreach with the FASB
Since 2002, the IASB has been working on many of its major projects jointly with the Financial Accounting Standards Board (FASB) in the US. Our intention is to produce standards that are as identical as possible. We have had good success on achieving converged standards on many, though not all, of our joint projects.
Why has the IASB been doing these convergence activities with FASB? We have two goals in mind:
- US acceptance of IFRSs for non-US companies registered with the Securities and Exchange Commission (SEC), and
- SEC recognition of IFRSs as a permitted or required financial reporting framework for some or all domestic US registrants.
We achieved the first of those goals in 2007, when the SEC dropped its requirement to present a reconciliation of net income and equity from IFRSs to US generally accepted accounting principles (GAAP) amounts for foreign registrants that follow IFRSs as issued by the IASB. We are hopeful that the SEC will announce some favourable action on the second goal by the end of 2011.
For our joint IASB-FASB projects, the two boards do some outreach jointly and other outreach separately. In most cases, the formal roundtables are conducted jointly, with members and staff from both boards participating. Some webcasts are also jointly presented. Examples of outreach activities that are typically done by the IASB or the FASB separately include meetings with national or industry organisations, groups of companies or investor groups.
Because the IASB’s constituency literally covers the globe, doing outreach jointly can be logistically difficult and cost-prohibitive. Whether outreach activities are done jointly or separately, staff periodically summarise the views expressed during those activities and present these summaries to the boards as agenda papers for joint board meetings. Moreover, the results of outreach activities are shared via weekly conference calls and other communications between the IASB and the FASB project teams. The feedback received eventually is incorporated into the staff papers that will be deliberated by the boards.
While successful completion of joint outreach activities can help achieve converged standards, that is not always the case. Though converged standards are the goal, in some cases the formal due process and more informal outreach activities have led to different project outcomes in IFRSs and US GAAP.
Click herefor an illustration of how the IASB used outreach activities as a way to seek the views of investors in our joint project on the offsetting of financial assets and financial liabilities.
| Seeking the views of investors in our project on offsetting financial assets and liabilities
Offsetting, or netting, is an important aspect of presentation in financial statements. Today, financial assets and financial liabilities may be presented in a company’s balance sheet as two separate amounts, or as a single net amount, depending on whether the company reports using IFRSs or US GAAP. The differences in the offsetting requirements account for the single largest quantitative difference in amounts presented in balance sheets today. This difference reduces comparability of financial statements and is especially prominent in the presentation of derivative financial instruments. As a result, investors requested and the Financial Stability Board recommended that the boards address these differences.
In January 2011 the boards issued a joint exposure draft proposing a converged solution – that offsetting should apply (and would in fact be required) only when the right of set-off is enforceable at all times and the ability to exercise this right does not depend on a future event. Companies must also intend to settle the amounts due with a single net payment or simultaneously.
To understand the views of users of financial statements and others, the IASB and FASB held 110 outreach meetings – roughly half in North America, a third in Europe, and the rest elsewhere in the world. Forty-two of those meetings (38 per cent) were with users of financial statements (including asset managers, analysts and rating agencies), and 21 more (another 19 per cent) were with clearinghouses, exchanges and regulators. Some of the meetings were face-to-face meetings, while others were video and telephone conferences. Most included both IASB and FASB staff.
The IASB also undertook a web-based survey for investors to give their views on the offsetting proposals and to explain what information they use and need when reviewing financial statements. The majority of respondents to the survey (53 per cent) were equity investors or analysts, and another 33 per cent were both fixed-income and equity investors or analysts. Additionally, the boards held public round-table meetings in London, Singapore and Norwalk.
In June 2011, in the light of the feedback received on the exposure draft, including feedback coming from joint outreach activities, the boards decided to move forward with different offsetting models.
The investor community was divided on gross versus net presentation. Views varied depending on the geographical location as well as the type of investor (ie whether they were buy side or sell side analysts and whether they were equity or credit analysts). However, irrespective of their views, investors were nearly unanimous that both gross and net information is useful, and both are required for analysing financial statements. And, investors said, if the international and US standards are going to have very different offsetting models, both must have information to help them reconcile between IFRSs and US GAAP.
Based heavily on investor input, the boards have developed and agreed on converged disclosure requirements to help investors compare offsetting in financial statements prepared in accordance with IFRSs and US GAAP. Those disclosure requirements will be effective beginning 1 January 2013, and must be applied retrospectively (ie to comparative periods). |